![]() Earnings of SOEs are relatively procyclical, in part because cheap financing costs from an implicit government guarantee allows them to expand faster during booms. In addition, within their stock portfolios, bullish managers reallocate toward firms in more cyclical industries and toward state-owned enterprises (SOEs). We find that optimistic growth expectations lead managers to choose more bullish portfolio allocations, shifting from cash or bonds to more equity investment and increasing the stock-market beta of their overall portfolios. ![]() We focus on actively managed equity and mixed (equity and bond) funds, for which managers would potentially be strategically adjusting their exposure to the broad economy through changes in equity positions. We next assess the extent to which managers’ investment decisions reflect their growth expectations. Managers’ growth expectations affect fund investment We also show that investment returns are higher for funds with managers who accurately forecast growth. We confirm that the average (“consensus”) expectation across managers (Figure 1) has short-term predictive power for measures of macroeconomic growth, specifically GDP and the Keqiang Index, which provides validation both for the expectations measure and for fund managers’ competence in macroeconomic analysis. The overall score for a fund report is the average of the scores we calculate from its clauses. The score value of keywords is 1, directional words take on a value from. Semantic clauses in a report can be scored if a keyword is accompanied by at least one directional word, and the score of a clause is computed as the product of its scorable parts. The assignment of scores draws on a dictionary of relevant words and phrases, including keywords that identify the topic (such as nouns like “GDP growth” and “national income”), directional words (such as “increase” or “stagnant”), and scaling words indicating magnitude (such as “mildly” and “potentially”) or negation (e.g., “no” or “not”). For ease of exposition, we display 0.2*consensus+0.1 on the left y-axis.Įach reading on a manager’s growth expectations is a value between -1 (a strongly pessimistic outlook) and +1 (strongly optimistic). The Keqiang Index is a linear combination of the growth rate of electricity consumption (weight = 0.4), bank loans (weight = 0.35), and railway cargo volume (weight = 0.25). Note: Data are quarterly from 2007 Q2 to 2020 Q3. An advantage of this approach is that these opinions come from the investors themselves, so they can be more directly linked to the investment decisions observed for the asset managers in the data set, to fund performance, and to the impact of managers’ growth expectations on the prices of the stocks that their funds hold or buy.įigure 1: Consensus growth expectation, real GDP growth, and Keqiang Index 2022) is Chinese mutual fund managers’ near-term macroeconomic growth forecasts, which are inferred by natural language processing of the qualitative discussion sections that were a required part of funds’ quarterly reports during the 2008–2020 sample period. ![]() The starting point for our paper (Ammer et al. For example, some studies have focused on information production from professional investment analysis, such as company earnings forecasts or credit ratings, which typically come from third parties, rather than active investors (Bradshaw 2011 Kothari, So, and Verdi 2016 White 2013 Livingston, Poon, and Zhou 2018). ![]() Empirical assessment of the who and how of price discovery generally requires data on the opinions, forecasts, investments, and/or ex post performance of a set of market participants or analysts. Given the large amounts of potentially relevant data and the cost of processing and interpreting it, a related question is how information gets into prices. When informationally efficient, the prices of actively traded corporate securities can improve resource allocation in the business sector (Fama 1970 Chen, Goldstein, and Jiang 2007). We also find that fund investment helps bring prices in line with firms’ longer-run earnings prospects. We identify a strong short-run causal effect of growth expectations on stock returns. We study how Chinese fund managers’ growth expectations affect their equity investment decisions, and in turn, the effects on stock prices. Mutual funds have become an important type of private institutional investor in Chinese security markets, with assets under management exceeding $3 trillion.
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